According to the World Bank, interest rate increases by central banks around the world could lead to a global recession in 2023. To combat rising prices, central banks have increased rates “with a degree of synchrony not witnessed over the preceding five decades,” the report said.
The rate of price growth, or inflation, just reached a 40-year high in the US and the UK. Raising interest rates makes borrowing more expensive, slowing the rate of price increases. But it also raises the cost of borrowing, which can impede economic expansion.
The US Federal Reserve and the Bank of England are both likely to raise major interest rates next week, so the World Bank’s warning comes before their meetings. The World Bank reported on Thursday that the world economy was experiencing its sharpest slump since 1970. It said a study found that “the world’s three largest economies – the US, China and the euro area – have been slowing sharply”. “Under the circumstances, even a moderate hit to the global economy over the next year could tip it into recession.”
To “reduce the degree of tightening needed,” the World Bank also urged central banks to coordinate their initiatives and “convey policy choices properly.”
Demand increased as constraints related to the pandemic loosened, while costs for electricity, fuel, and food rose as a result of the conflict in Ukraine. In response, interest rates have been increased by central bank policymakers to reduce demand from consumers and companies. However, significant rate hikes raise the possibility of a recession because they might slow down the economy.
Normally, central banks don’t consult their colleagues before making a decision. However, they have previously coordinated their efforts to assist the world economy.
Markets weaken
Asian markets declined on Friday as traders anticipated a rate increase in the United States next week and as worries about a worldwide recession increased in response to warnings from the World Bank and the International Monetary Fund. It’s still unclear whether there will be a broad worldwide recession, but the global economic picture is still bleak. Some countries are predicted to enter a recession in 2023.
Global growth was downgraded by the IMF in July to 3.2% in 2022 and 2.9% in 2023. Next month, a fresh viewpoint will be released.
